March 21, 2009

By Donald S. Paris, CPA, MST

Like everyone else, you have had a horrible time during this recession. You continue to ask yourself (as well as all your friends and colleagues), "when will this be over?" If there is one thing you can take from all the bad news, you are not alone. We are all in this together. But, there are specific things you can do to help weather the storm. And those things will help you to not only get through it, but even help you end up stronger than you were before this mess started.

Let’s start with planning. I am not talking about the kind of planning where you figure out how to market your product, but instead, serious financial planning for your business. If you have Microsoft Excel and a complete understanding of your business, you can do it (or just call your CPA). Start by including every account in your Chart of Accounts on one Excel worksheet. Then, create worksheets for a balance sheet, an income statement, and most importantly a cash flow statement. Those separate worksheets will be completely dependent on that first Chart of Accounts worksheet. That way, as you make adjustments, you can see just how that affects your financial statements, your operations, and your businesses future.

This exercise was mind blowing for one of my clients. It probably took us close to a month to get it right. At first, they couldn’t understand why no matter what they did, they just kept losing money. They realistically input all revenue numbers. All the expenses were right in line with their history. So, the light bulb started coming on as we started to think differently than in the past. We started with Accounts Receivable and its aging. What if, instead of billing monthly, they billed clients semi-monthly or even weekly? Now the cash started to come in more evenly. What if they moved facilities to a smaller, more efficient facility? Now the numbers inched toward profitability. What if they had their workers telecommute, and instead of spending money on facilities, they spent less money on the infrastructure needed to support workers at home, and occasionally in the office. The numbers were better, but still not enough to get red ink to turn black.

What if we looked at the clients, not from an amount of revenue point of view, but instead from a profitability point of view? That was a very difficult one. The results were startling. The concept was simply that they could not afford to continue to service clients that were unprofitable. Period. The list was drawn, and clients were placed into 3 categories, i.e. profitable, marginally profitable and unprofitable. They went to the unprofitable clients and told them that they were not charging them enough for the service provided, and simply that if they were not able to renegotiate terms with that client, that they would not be able to continue to provide the service. Interesting things happen when you do this. Some clients say that they knew that all along, but figured that you knew your own business best, and that if you wanted to charge such a low amount, who were they to complain. But, now that you have mentioned it, and since they love the service, they want to stay with you, as long as the increase is reasonable. Some, on the other hand, say they cannot afford to pay you more. This is the group that leaves, and you need to be comfortable saying "Good riddance". Yes, your revenue numbers go down, but do not forget for a second that your expenses also go down by an even greater number, yielding a higher net profit.

Now you ask yourself, how do the expenses go down? If you are in a product business, you purchase less product, need less room to store it, and need less people to service it. If you are in a service business, you need less people, period. Letting folks go is not an easy thing. No one likes to fire anybody. But sometimes it is necessary. Note that it is the last thing on this list.

So, start with the financial projections. Keep an open mind, and do not lapse into how you have done things in the past. The exercise will change your business plan perceptions, and set your business on track for a profitable future.

Article edited by Harry C. Ballman, MBA CPA and Arthur J. Dykes, CPA